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Chapter 12

ACCT 1201 Chapter Notes - Chapter 12: Deferral, Free Cash Flow, Accrual


Department
Accounting
Course Code
ACCT 1201
Professor
Ganesh Krishnamoorthy
Chapter
12

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04/07/2014
The cash flow statement focuses attention on a firm’s ability
Generate cash internally
Management of operating assets and liabilities
And the details of its investments and external financing
Answers questions such as
Will a company have enough cash to pay short-term creditors
Is the company adequately managing its accounts receivable and
inventory
Is the company investing in productive capacity
Does it rely on internal or external financing
Is the company changing the makeup of its external financing
Classifications of The Statement of Cash Flows
Basically the statement of cash flows explains how the amount of
cash on the balance sheet at the beginning of the period has
become the amount of cash reported at the end of the period
Cash includes cash equivalents such as highly liquid assets that are
more easily converted to cash or near maturity date that their value will not
change.
Generally only investments with original maturities of three months
of less qualify as cash equivalents
Cash Flows From Operating Activities
Are the cash inflows and outflows that relate directly to revenues
and expenses reported on the income statement.
Two approaches for presenting operating activities
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The direct method reports the components of cash flows from
operating activities as gross receipts and gross payments.
o The difference between the inflows and outflows is called net
cash inflow/outflow from operating activities.
The indirect method starts with net income from the income
statement and then eliminates noncash items to arrive at net cash
flows from operating activities
oNet income +/- Adjustments for noncash items=Net cash flow
Both methods arrive at the same numbers
Cash Flows From Investing Activities
Are cash inflows and outflows related to the purchase and disposal
of long-lived productive assets and investments in the securities of
other companies
oTypically cash paid or received for the acquisition or sale of an
asset or investment.
The difference is called net cash inflow/outflow
Cash Flows From Financing Activities
Include exchanges of cash with creditors and owners
oInflows include
Borrowing on notes
Issuing stock
oOutflows
Repayment of a principal of a loan
Repurchasing stock from owners
Dividends to owners.
The difference between outflows and inflows is called net cash
inflows/outflows from financing activities
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Net Increase (Decrease) In Cash
The combination of the net cash flows from operating activities,
investing activities, and financing activities must equal the net
increase/decrease in cash
Relationships to the Balance Sheet and Income Statement
Companies cannot prepare statements of cash flows using the
amounts in T-accounts because those amounts are based on accrual
accounting.
To prepare the statement of cash flows you need the following data
Comparative Balance Sheet used in calculating the cash flows
from all activities
A complete income statement used primarily in calculating cash
flows from operating activities
Additional details concerning selected accounts where the total
change amount in an account balance during the year does not
reveal the underlying nature of the cash flows
Cash =Liabilities + SE – Noncash Items
Meaning
Changes in Cash = Changes in Liabilities + Changes in SE – Changes
in Noncash Assets
Thus
Any transaction that changes cash must be accompanies by a change
in liabilities, stockholders equity, or noncash assets.
Preliminary Steps in Preparing the Cash Flow Statement
Determine the change in each balance sheet account
oFrom this year’s ending balance, subtracted to this years
beginning balance
Classify each change as relating to operating, investing, or finacnig
activities
The balance sheet accounts related to earning income should be
marked operating which includes
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